What actually happens
An employee who lives in Illinois and performs work in Michigan sits in two tax systems at once. The residence state claims the right to tax all of a resident's income wherever earned; the work state claims the right to tax income sourced within its borders. Michigan and Illinois resolved that overlap by agreement: the work state gives up its claim on commuters' wages entirely.
The certificate is not optional
Reciprocity does not apply automatically because the employee's address is in Illinois. It applies when the employee gives you a signed MI-W4 (Employee's Michigan Withholding Exemption Certificate (reciprocal-state exemption line)). Until that form is in your hands you are required to withhold Michigan tax, and an auditor will ask to see it. The form stays in your records; it is not filed with the state.
Unemployment insurance goes to one state only
Income tax can be split between states. Unemployment insurance cannot. Under the localization test used by every state, an employee whose services are performed entirely in Michigan is covered by Michigan for unemployment purposes, and all wages are reported there — regardless of where they live, where you are headquartered, or which state's income tax you withhold. Michigan's 2026 taxable wage base is $9,000. The four-factor test in order.
Local taxes are a separate problem
Michigan: 24 Michigan cities levy a municipal income tax (Detroit at 2.4% resident / 1.2% nonresident; most others 1% resident / 0.5% nonresident). Employers in those cities must withhold city tax separately. Michigan's state reciprocity agreements do NOT exempt an employee from Michigan CITY income tax on work physically performed in the city -- Detroit in particular taxes nonresidents on Detroit workdays.
What you have to register for
| Obligation | State | Agency |
|---|---|---|
| Income tax withholding | Illinois | Illinois Department of Revenue |
| Unemployment insurance | Michigan | Michigan Unemployment Insurance Agency (UIA) |
Frequently asked
Do Michigan and Illinois have a reciprocal tax agreement?
Yes. Michigan exempts Illinois residents from Michigan income tax withholding on wages, provided the employee files MI-W4 with their employer. Without that form on file the employer must still withhold Michigan tax.
Which state's income tax should be withheld?
Illinois. Under the agreement the wages are taxable only by the state of residence, so you withhold Illinois tax and stop withholding Michigan tax once the certificate is filed.
Which state gets the unemployment insurance wages?
Michigan. Unemployment coverage is never split between states for a single job. The localization test assigns the whole job to the state where services are performed, which here is Michigan, regardless of residence or where the employer is headquartered.